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Crompton Greaves: Profit surge continues

Feb 1, 2011

Crompton Greaves has declared its 3QFY11 results. The company has reported around 7% YoY growth in sales while its net profits have grown by almost 17% YoY. Here is our analysis of the results.

Performance summary

Consolidated sales grow by 7% YoY during 3QFY11, led by strong performance from the ‘consumer products’ and ‘industrial systems’ business, which records a YoY growth of 30% and 23% respectively.

Operating profits grow by 6% during the quarter. Raw material costs and employee costs as a percent of sales stood at 50% and 12.5% respectively, almost similar to their proportion of sales during 3QFY10.

Net profits grow by 17% aided by a 22% decline in interest costs and a 27% decline in tax expense.

At the end of 3QFY11, the consolidated unexecuted order book stood at 70.2 bn, up around 15% YoY. This order backlog is nearly 73% of the trailing twelve month sales.

Consolidated performance snapshot

(Rs m)

3QFY10

3QFY11

Change

9mFY10

9mFY11

Change

Sales

22,464

23,970

6.7%

66,330

70,971

7.0%

Expenditure

19,265

20,568

6.8%

57,587

61,264

6.4%

Operating profit (EBDITA)

3,200

3,402

6.3%

8,743

9,707

11.0%

Operating profit margin (%)

14.2%

14.2%

13.2%

13.7%

Other income

215

120

-44.1%

607

531

-12.6%

Interest

49

39

-21.7%

146

137

-6.0%

Depreciation

395

467

18.2%

1,154

1,340

16.1%

Profit before tax

2,971

3,017

1.5%

8,051

8,761

8.8%

Tax

968

703

-27.4%

2,512

2,417

-3.8%

Minority interest

11

1

-94.6%

24

2

-93.3%

Share of profit/(loss) of associate

5

15

202.0%

19

29

56.7%

Profit after tax/(loss)

1,996

2,328

16.6%

5,534

6,372

15.2%

Net profit margin (%)

8.9%

9.7%

8.3%

9.0%

No. of shares

641.2

641.7

Diluted earnings per share (Rs)*

14.2

P/E ratio (x)*

19.2

* On a trailing 12-months basis

What has driven performance in 3QFY10?

The 6.7% YoY growth in Crompton Greaves’ (CG) consolidated sales during 3QFY11 was largely a result of strong performance in its consumer products and industrial systems business. The consumer products business was the star performer of the quarter recording a 30% YoY growth. This segment now contributes to nearly 20% share in revenues as compared to 16% share during 3QFY10. Sales of the ‘industrial systems’ business also saw a good growth of 23% YoY during the quarter.

Segment-wise performance (Consolidated)

3QFY10

3QFY11

Change

9mFY10

9mFY11

Change

Power Systems

Revenue (Rs m)

15,596

15,452

-0.9%

45,206

45,794

1.3%

% share

69.8%

64.3%

68.7%

64.4%

PBIT margin

12.9%

13.0%

11.5%

12.0%

Consumer Products

Revenue (Rs m)

3,647

4,751

30.3%

11,516

14,704

27.7%

% share

16.3%

19.8%

17.5%

20.7%

PBIT margin

14.4%

14.0%

14.1%

14.6%

Industrial Systems

Revenue (Rs m)

3,100

3,809

22.9%

9,111

10,625

16.6%

% share

13.9%

15.9%

13.8%

14.9%

PBIT margin

20.7%

18.2%

20.5%

18.8%

Total

Revenue (Rs m)*

22,343

24,012

7.5%

65,833

71,123

8.0%

PBIT margin

14.4%

13.4%

13.4%

18.1%

* Excluding inter-segment adjustments

The power systems business continues to see a muted growth. There is a slowdown in order inflow from the utilities and Power Grid. Price realizations are under pressure. The transformers business has grown in volume terms (MVA) with an increase of nearly 31%, but in value terms the increase has been just 2-3%. The management expects the power systems segment to see a muted growth for the next quarter as well.

CG’s overall operating margins during 3QFY11 were at 14.2%. This was almost similar to the operating profit margins during 3QFY10.

Lower interest costs and decrease in tax expense have driven the net profit margins upwards. Net profit margins rose by 0.8% during the quarter to stand at 9.7%.

What to expect?

At the current price of Rs 272, the stock is trading at a multiple of 16 times our estimated consolidated FY13 earnings. Rising input prices and falling realizations are a cause of worry. The company continued to maintain healthy margins because of better operational efficiencies and cost cutting in other overheads. However the management has indicated that if the pressure on input prices persists further, the margins may subsequently get impacted. Additionally, there is an overcapacity in the transmission and distribution sector. The price realizations are squeezing. The management expects the power systems segment to see a muted growth during the next quarter as well. On account of expected orders from Power Grid, the management expects the power systems segment to pick during the second half of the year.

The management expects a 16-18% sales growth for FY12. It has however ruled out an upside in margins, but has said that the company will maintain margins at the current levels. In terms of valuations, the stock seems to be trading at reasonable levels. However considering the slowdown in order inflow in the power segment and the uncertainty over input prices in the near term we advice a cautious view on the stock.

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